HAPTER 12 3. Assume that you want to have $160,000 saved seven years from now. I

Question

HAPTER 12 3. Assume that you want to have $160,000 saved seven years from now. If you can in invest? you r funds at a 6% interest rate, how much do you currently need to 4. Your aunt Eugenia plans to give you $2,000 at the end of every year for the next 10 years. If you invest each of her yearly gifts at a 12% interest rate, how much will they be worth at the end of the 10-year period? 5. Suppose you want to buy a small cabin in the mountains four years from now, You estimate that the property will cost $51,000 at that time. How much money do you need to invest each year in an interest-bearing account earning 6% per year to accumulate the purchase price? E12-27A Calculate NPv-equal annual cash inflows (Learning Objective 4) Use the NPV method to determine whether Vargas Products should invest in the follow- ing projects: Project A costs $280,000 and offers eight annual net cash inflows of $56,000. Vargas Products requires an annual return of 16% on projects like A. Project B costs $380,000 and offers nine annual net cash inflows of $74,000. Vargas . Products demands an annual return of 12% on investments of this nature. Requirement What is the NPV of each project? What is the maximum acceptable price to pay for each project? 28A Calculate IRR-equal cash inflows (Learning Objective 4) E12- Refer to Vargas Products in E12-27A. Compute the IRR of each project and use this infor- mation to identify the better investment. E12-29A Calculate NPV-unequal cash flows (Learning Objective 4) atomate one phase of its oroduction process

Explanation / Answer

E12-27A: PROJECT A: PV of net cash inflows = 56000*PVIFA(16,8) = 56000*4.3436 = $   243,241.60 Less: Initial cost $   280,000.00 NPV $   (36,758.40) PROJECT B: PV of net cash inflows = 74000*PVIFA(12,9) = 74000*5.3282 = $   394,286.80 Less: Initial cost $   380,000.00 NPV $     14,286.80 MAXIMUM ACCEPTABLE PRICE is that iniital cost for which NPV=0. If NPV = 0, Initial cost=PV of cash inflows. Hence, maximum price acceptable is For Project A $   243,241.60 For Project B $   394,286.80

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